Composite leading indicators: the forecasters’ forecast

To the uninitiated, a double Hodrick-Prescott filter probably sounds like something a 1920s spaceship used to reduce coal consumption during long flights. But as some of you probably know, and I certainly didn’t until this morning, it is in fact a mathematical means used to help spot turning points in a time series. So, it’s not rocket science, but it is every bit as complicated. And very useful in calculating the OECD Composite Leading Indicators, published today.

The turning points that the CLIs spot are those in the business cycle, and experience over the past 30 years shows that the turning points of the CLIs consistently precede those of the business cycle, with lead times of about 6 – 9 months. In fact in the animated graph of the OECD Business Cycle Clock, it looks like GDP is stalking the CLIs around the axes.

The CLIs work by comparing a country, or group of countries, with itself, looking at how the latest figures compare with long-term trends – is the country doing better or worse than long term trends suggest it should. They provide qualitative information rather than quantitative measures, but by forecasting changes in direction of the economy, they help economists, businesses and policymakers to improve their analysis of current trends and anticipate economic developments.

The indicators used to build the CLIs include both facts and opinions, such as the number of new houses being built or a consumer confidence indicator. The actual components vary from one country to another, with Turkey for example including electricity production while Belgium’s CLI uses new passenger car registrations. You can find the components of the CLI for each OECD country, the BRIICS, and various regional groupings here.

So what do they latest figures reveal? Weakening growth in most major economies, I’m afraid. The CLIs for the United States and Japan continue to show signs of moderating growth while in Canada the CLI points to weak growth. In Germany, France, Italy and the Euro Area as a whole, the CLIs point to continued weakening growth. In China, the CLI points to soft growth, but tentative signs are emerging that the recent deterioration in the short-term outlook may have stabilised. In India and Russia, the CLIs continue to point to weak growth.